Governor breaks the T-word ice $700 million in new taxes proposed for state.

After months of playing chicken with the legislature over new taxes, Gov. William Donald Schaefer has made the first move -- in a big way.

To deal with a looming $1.2 billion budget deficit next year, Schaefer yesterday proposed $700 million in new taxes and $500 million in budget cuts.

"Don't be afraid of new directions," the governor told skittish lawmakers in his State of the State address. "Don't be afraid to step out and make a tough decision."

Schaefer's program would make it more expensive to drive a car, buy a six-pack of beer or a bottle of wine, smoke a cigarette, repair a car, dry-clean a suit or get a haircut.

A nickel-a-gallon increase in the state's gasoline tax would restart Maryland's highway construction program and provide jobs in a recession-battered economy. It also would give Maryland one of the highest gas taxes in the nation.

Schaefer also proposed revamping the state income tax to take a heavier bite from wealthier taxpayers.

While the governor has often turned off legislators with rambling addresses, histrionics and gimmicks, yesterday's appeal was well-scripted and straightforward. Even critics of his proposals were impressed.

"In many ways, it was the best and most substantive speech the governor has given," said Sen. Howard R. Denis, R-Montgomery. "I don't agree with much of what he said, but he exercised leadership. The speech made me think he wants a more businesslike relationship with the General Assembly."

Whether he made any converts in a General Assembly caught between demands for services and opposition to new taxes remains to be seen.

House Speaker R. Clayton Mitchell Jr., D-Eastern Shore, a key player in the budget stakes, said he still wants to see if spending can be cut further before he's willing to consider new taxes.

But Schaefer argued that he has already cut spending to the bone.

He said he plans to absorb $500 million of the deficit by cutting state programs and agencies in the fiscal 1993 budget he will submit to the legislature at month's end.

But he said the remaining $700 million gap could be closed only through higher taxes and a relaxation of legally mandated local aid programs.

"We only funded the basics, and we're still $700 million short," he said in his 38-minute speech from the rostrum of the House of Delegates. "That's not a made-up number: We're $700 million short.

"Without a solution, we're faced with eliminating whole agencies, bankrupting local government, [and] hurting the most vulnerable people," he said.

The governor said he opposed increasing the state's 5 percent sales tax rate because it would disproportionately hurt the poor. But he called for broad expansion of what is currently taxed and for a repeal of existing sales tax exemptions, saying, "Special interests must step aside."

Schaefer called for changes in the laws that require the state to send to Baltimore and the 23 counties $240 million in aid through property tax grants, shared alcohol tax revenues and subsidies for "resident state trooper" programs in rural counties.

But he said he would not touch the biggest state aid program of all -- aid for public schools -- or the $184.4 million increase in so-called APEX education funding scheduled for 1993.

While he would take away direct state aid, the governor proposed giving subdivisions the chance to replace it themselves by letting them raise maximum piggyback income tax rates from 50 percent to 60 percent of state income tax.

He also proposed redistributing 5 percent of the first 50 percent to jurisdictions where the money is earned, rather than to where the taxpayer lives. This basic change in tax policy is designed to help financially strapped Baltimore, and it immediately created controversy.

Senate President Thomas V. Mike Miller Jr., D-Prince George's, derisively referred to it as "a commuter tax" and said he was opposed.

Even Del. Elijah E. Cummings, D-City, expressed concern that the place-of-earnings tax would aggravate and alienate his legislative colleagues from neighboring Baltimore County.

But Sen. John A. Pica Jr., D-City, chairman of Baltimore's Senate delegation, called the governor's plan "a good package for the city. It was a bold and courageous statement. [The governor] embraced the cornerstone of our position."

Besides the shift in piggyback taxes toward the city, Schaefer proposed that the Baltimore Zoo be turned into a state park, the latest in a series of moves to shift financial responsibility for costly city institutions to the state.

While taxes caught everyone's attention, the governor also spoke briefly about other initiatives.

He said he wants to combine the Maryland Stadium Authority and the Convention Center Authority. That, his aides explained, would reduceoverhead and take advantage of the Stadium Authority's construction experience to oversee a proposed expansion of city's Convention Center.

Schaefer also offered two proposals to reduce real estate closing costs in Maryland, which are among the highest in the nation.